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In the NYT over the weekend, some analyst was quoted as saying that the Dow will be at 6000 by year's end. Personally, I won't be a bit surprised to see it break 10K, but I doubt 6K is a year-end target. (Another analyst was quoted as predicting that this turmoil is just temporary, and the Dow will be nearly 15K in December. I don't believe him, either, but I think the first guy is a lot closer to the truth.) The above chart purports to show that the serious support doesn't really begin until well below 5000.

The chart also shows the Dow adjusted for inflation. Those returns don't look so great any more, although they're better than what people made in banks or mattresses. Something to consider for those who think stocks are on sale now.

Also note that people who dumped their money in near the market peak didn't really get it back for thirty years or so -- and the chart doesn't take taxes into account. This assumes that those people didn't go bankrupt and get thirty years of compounding against a zero balance.

Anyway, with tomorrow looking like it'll be another cliff-dive, I wish I'd rolled my money over into DXD on Friday instead of sitting out the weekend to look for new things to move into. I'd decided on Saturday to short China (FXP is a China double-inverse ETF). Oh well, a day fucking late. But puts on high-end retailers like Nordstrom's and credit-card issuers like COF should be fun.

Bw8472 wrote:[Bank of America] did the FED or and the market a solid that in truth costs them nothing, they already were in line for the assets but this way they spend a little extra to float CFC and then basically it's like quarantining a new fish you bought, if it looks good in a week or in this case a few years in the tank it goes, if not, flush but in this case you get to keep all the neat accessories that came with it.

By Ambrose Evans-Pritchard, International Business EditorLast Updated: 12:39am GMT 04/03/2008Page 1 of 2

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The verdict is in. The Fed's emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.

Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter.

The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe.

It is hard to imagine a more plain-vanilla outfit than the Port Authority of New York and New Jersey, which manages bridges, bus terminals, and airports.

The authority is a public body, backed by the two states. Yet it had to pay 20pc rates in February after the near closure of the $330bn (£166m) "term-auction" market. It had originally expected to pay 4.3pc, but that was aeons ago in financial time.advertisement

"I never thought I would see anything like this in my life," said James Steele, an HSBC economist in New York.

No sane mortal needs to know what term-auction means, except that it too became a tool of the US credit alchemists. Banks briefly used the market as laboratory for conjuring long-term loans at Alan Greenspan's giveaway short-term rates. It has come unstuck. Next in line is the $45trillion derivatives market for credit default swaps (CDS).

Last week, the spreads on high-yield US bonds vaulted to 718 basis points. The iTraxx Crossover index measuring corporate default risk in Europe smashed the 600 barrier. We are now far beyond the August spike.

Sub-prime debt is plumbing new depths. A-rated securities issued in early 2007 fell to a record 12.72pc of face value on Friday. The BBB tier fetched 10.42pc. The "toxic" tranches are worthless.

Why won't it end? Because US house prices are in free fall. The Case-Shiller index for the 20 biggest cities dropped 9.1pc year-on-year in December. The annualised rate of fall was 18pc in the fourth quarter, and gathering speed.

As the graph shows below, US households are only halfway through the tsunami of rate resets - 300 basis points upwards - on teaser loans.

The UK hedge fund Peloton Partners misjudged this fresh leg of the crunch. After an 87pc profit last year betting against sub-prime, it switched sides to play the rebound. Last week it had to liquidate a $2bn fund.

Like many, Peloton thought Fed rate cuts from 5.25pc to 3pc (with more to come) would end the panic. But this is not a normal downturn, subject to normal recovery. Leverage is too extreme. Bank capital is too eroded. Monetary traction eludes the Fed. An "Austrian" purge is under way.

UBS says the cost of the credit debacle will reach $600bn. "Leveraged risk is a cancer in this market."

Try $1trillion, says New York professor Nouriel Roubin. Contagion is moving up the ladder to prime mortgages, commercial property, home equity loans, car loans, credit cards and student loans. We have not even begun Wave Two: the British, Club Med, East European, and Antipodean house busts.

As the once unthinkable unfolds, the leaders of global finance dither. The Europeans are frozen in the headlights: trembling before a false inflation; cowed by an atavistic Bundesbank; waiting passively for the Atlantic storm to hit.

Half the eurozone is grinding to a halt. Italy is slipping into recession. Property prices are flat or falling in Ireland, Spain, France, southern Italy and now Germany. French consumer moral is the lowest in 20 years.

The euro fetches $1.52 (from $0.82 in 2000), beyond the pain threshold for aircraft, cars, luxury goods and textiles. The manufacturing base of southern Europe is largely below water. As Le Figaro wrote last week, the survival of monetary union is in doubt. Yet still, the ECB waits; still the German-bloc governors breathe fire about inflation.

The Fed is now singing from a different hymn book, warning of the "possibility of some very unfavourable outcomes". Inflation is not one of them.

"There probably will be some bank failures," said Ben Bernanke. He knows perfectly well that the US price spike is a bogus scare, the tail-end of a food and fuel shock.

"I expect inflation to come down. I don't think we're anywhere near the situation in the 1970s," he told Congress.

Indeed not. Real wages are being squeezed. Oil and "Ags" are acting as a tax. December unemployment jumped at the fastest rate in a quarter century.

The greater risk is slump, says Princetown Professor Paul Krugman. "The Fed is studying the Japanese experience with zero rates very closely. The problem is that if they want to cut rates as aggressively as they did in the early 1990s and 2001, they have to go below zero."advertisement

This means "quantitative easing" as it was called in Japan. As Ben Bernanke spelled out in November 2002, the Fed can inject money by purchasing great chunks of the bond market.

Section 13 of the Federal Reserve Act allows the bank - in "exigent circumstances" - to lend money to anybody, and take upon itself the credit risk. It has not done so since the 1930s.

Ultimately the big guns have the means to stop descent into an economic Ice Age. But will they act in time?

"We are becoming increasingly concerned that the authorities in the world do not get it," said Bernard Connolly, global strategist at Banque AIG.

"The extent of de-leveraging involves a wholesale destruction of credit. The risk is that the 'shadow banking system' completely collapses," he said.

For the first time since this Greek tragedy began, I am now really frightened.

I had been fairly skeptical on the "deflation" scenario. I'm still not convinced, but I'm ready to jump out of the inflation camp on an instant's notice.

Mr He wrote:Where did the Dow go from peak to trough in the big bear market in the 1970's?

6,000 to 2,000?

Just curious.

Not sure. Best I could find after some digging is on Wikipedia:"1967 - 1982: Bear market. Traders deal with a stagnant economy in an inflationary monetary environment. The Dow enters two long downturns in 1970 and 1974; during the latter, it falls nearly 45% to the bottom of a 20-year range. The index approaches the 1,000 milestone at the top of its range three times in 1972, 1976 and 1981, but fails to break the mark decisively."

And, Maposquid was right about SRS and SKF, ultrashorts on real estate and financials. Almost everything on my chart is red today except those two, up almost 10% and almost 8% overnight. I bought the real estate one a little while ago and lost out when the Fed announced its huge rate cut, but I'm almost back where I started and confident those two will keep rising. Real estate and Financials are obviously far from the bottom.

Defaults on home mortgages touched another all-time high at the end of the last year as foreclosures surged on adjustable-rate mortgages, an industry group reported on Thursday. . .

Douglas Duncan, the chief economist for the Mortgage Bankers, said the rates would probably rise further for much of this year as house prices fall further and banks and investors remain unwilling to lend and buy mortgage securities.

“We don’t expect to see the peak in delinquencies and foreclosure until mid- to late 2008,” he said

The crisis has cost the global banking sector well in excess of $100 billion in debt write-downs so far, but losses tied to the credit turmoil will probably exceed $600 billion, with banks and brokers accounting for more than half of that, UBS said in a note published Friday. . .

I think tomorrow (i.e., Friday -- "today" where you are) is gonna be The Big One. ADP's (*) presaging of the official jobs report is dismal. A "Fast Money" commentator said he could see S&P below 1236 tomorrow. 1270 is a support level, but a lot of people think we'll blow through it.

Of course, Bernanke could pull another emergency rate cut, too. Rumors are that there was/is another emergency Fed meeting today, at which increasing and modifying the TAF nonsense was discussed, for announcement tomorrow. It's not like it'll help, really, but they're trying to pull a rabbit out of their ass. Treasury quashed a rumor being spread by FNM and FRE that they were going to get bailed out, which added to today's carnage.

A lot of REITs got slaughtered today. CMO and ANH might be short-to-zeroes (wish I'd known about them yesterday). I made good money on NLY puts, but some knowledgeable folks say that NLY has smart and honest management, and has saved itself in the past by going short at appropriate times, so maybe it's time for me to take my money out of those puts and move it elsewhere -- simply adding to my SRS would do the trick and be a lot safer.

(*) ADP is the largest payroll processing service in the U.S., and issues its own job numbers two days before the federal government issues its statistics. Didn't see them, but I heard they were negative for the first time ever, or something like that.

EDIT: Found it. Negative "for the first time in four years", at -23,000, and January's numbers were revised downward either to or by 11,000.

I think it looks like we are entering a bear market, I don't know about average peak to trough times and percentages anymore, however I think that equities might be an iffy investment going forward and until the markets bottom - in 2010-12?

Mr He wrote:I think it looks like we are entering a bear market, I don't know about average peak to trough times and percentages anymore, however I think that equities might be an iffy investment going forward and until the markets bottom - in 2010-12?

Expect lots of head fakes and false optimism.

Depends on how deep the recession is. Considering the credit collapse, this one is likely to be very bad. I've read estimates expecting between a 30% to 50% drop in equity prices.

The headfakes and false optimism are running rampant already. Also, volatility is so high that puts are outrageously expensive. I'm in the middle of switching brokers so I can start writing naked calls instead of buying puts. Considering my risk aversion, this can be taken as a sign of impending crapocalypse.

Wall Street banks are facing a "systemic margin call" that may deplete banks of $325 billion of capital due to deteriorating subprime U.S. mortgages, JPMorgan Chase & Co (JPM.N), said in a report late on Friday.

JPMorgan, which sent a default notice to Thornburg Mortgage Inc. (TMA.N) after the lender missed a $28 million margin call, said more default notices and margin calls were likely. The Carlyle Group's mortgage fund also failed to meet $37 million in margin calls this week.

"A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," according to the report co-authored by analyst Christopher Flanagan. "We would characterize this situation as a systemic margin call."

The credit crisis that began about a year ago will likely intensify after Friday's weak February U.S. employment report "that most definitely signals recession," JPMorgan said.

Indeed, corporate bond spreads widened to a new record on Friday, surpassing levels seen in October 2002 during a boom in bankruptcies following the dot-com crash. U.S. employers cut payrolls in February for a second consecutive month, slashing 63,000 jobs, the biggest monthly job decline in nearly five years, the U.S. Labor Department reported on Friday.

"The weak February employment report points to an economy in recession," JPMorgan said.

The JPMorgan report included a revised bleaker forecast for subprime-related home prices. The bank now sees prices falling 30 percent, from its prior 25 percent forecast. Those prices have declined 14 percent since mid-2006, JPMorgan said.

The U.S. jobs results also came after the Federal Reserve expanded the amount of its short-term auctions to $100 billion in total in the central bank's latest effort to ease credit concerns. Ongoing concerns about bond insurers, known as monolines, and their effort to save their top ratings also are weighing on market sentiment.

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